Developing Management Skills Understanding Financial Statements

Why Use Them?  Business Survival  Business Growth  Business Profitability  Decision-Making  Internal Management Tool

For All Businesses?  YES!  Not just for purpose of getting loans, or issuing stock  Should be used to support all business decisions  Prepared in standard manner  Generally Accepted Accounting Principles (GAPP) – standards/guidelines to ensure information is reliable and understandable

Key Financial Statements  Balance Sheet  Income Statement  Cash Flow Statement

Balance Sheet  Company’s financial position  Financial “health”  Also called “statement of condition” or “statement of financial position”  Referred to as “photograph” of business- is a snapshot of financial position at particular moment in time  Balance sheet changes as business position changes!

Parts of Balance Sheet I. Assets - what a business owns Current Assets- cash or anything that will be converted into cash within one year ( marketable securities, accounts receivable, and inventories) Fixed Assets- also called long-term assets- more permanent items with life of more than one year (buildings, major equipment) Assets are recorded in accounting system as debit balances

Parts of Balance Sheet II. Liabilities – what a business owes Current Liabilites- must be paid within a year or less. (Accounts payable- inventories, rent, utilities, etc.; accrued wages, and current portion of longer- term notes payable) Long Term Liabilities- items that do not mature within one year (bank loans, mortgages, other longer- term obligations. Liabilities are recorded in accounting system as credit balances

Parts of Balance Sheet III. Net Worth – difference between the value of assets and value of liabilities  For Publicly traded companies, this is also called “shareholder equity”.  If value of assets exceed liabilities business has positive net worth  If value of assets is LESS than liabilities business has negative net worth

Class Activity  Divide into groups of 2-3 people  Research balance sheets on the Internet  Review “simple” balance sheet samples for better understanding  Create a template for a balance sheet for school store. The marketing teacher will give basic financial information for this  Send balance sheet to  50 Points